If the future value of an ordinary, 5-year annuity is $100,000 and interest rates are 5 percent, what is the future value of the same annuity due?
To calculate the future value of an annuity due, you need to understand the difference between an ordinary annuity and an annuity due.
An ordinary annuity is a series of equal cash flows received or paid at the end of equally spaced periods. These cash flows are commonly referred to as ordinary annuity payments.
On the other hand, an annuity due is similar to an ordinary annuity, but the cash flows are received or paid at the beginning of each period instead of the end.
To find the future value of an ordinary annuity due, we can use the following formula:
Future Value of Annuity Due = (Future Value of Ordinary Annuity) * (1 + Interest Rate)
In this case, the future value of the ordinary annuity is given as $100,000, and the interest rate is 5 percent.
Now, we can plug in the given values into the formula:
Future Value of Annuity Due = $100,000 * (1 + 0.05)
Calculating the expression inside the parentheses:
Future Value of Annuity Due = $100,000 * 1.05
Multiplying the numbers:
Future Value of Annuity Due = $105,000
Therefore, the future value of the same 5-year annuity due, with an interest rate of 5 percent, is $105,000.